A radical rethink of how older Australians finance their retirement is needed, as current practices are leaving too many people behind, say academics from the School of Economics, Finance and Marketing, of RMIT University.
Their report, “Reverse Mortgages – Financing Ageing in Place”, completed in partnership with Heartland Seniors Finance, investigates for the first time how Australians spend the money they receive from their mortgage loans, with a focus on the use of equity release products such as reverse mortgages.
The number of seniors using their residential mortgage loans to pay existing debt is increasing, with 31% of all equity release customers and 51% of new customers using their loan for this purpose. This is a contrast to the number of people using the money for extra income, which accounted for only 29% of all customers and just 20% of new customers.
The report calls for older Australians to utilise equity release products to access some of the money tied up in the home to finance their retirement.
A more mainstream use of these relatively unknown loan products could help solve the current problem that sees too many Australians – particularly older women – retiring without enough assets to enjoy a reasonable standard of living.
The ‘traditional’ three pillars of retirement funding – pensions, super and private savings, will be inadequate for many retirees, report lead author Associate Professor Stuart Thomas says, especially in the later stages of their retirement.
“The motive to stay in the family as long as possible is strong, but many retirees may not be able to afford to do so comfortably,” Mr Thomas said.
“Equity release products have the potential to be the fourth pillar of retirement however, they are not well understood, and the markets are not well developed in Australia.
However, before widespread use of equity release is possible, the report authors say a change in attitude about home reversion schemes, and the right way to fund retirement, is required from Australians.Mr Thomas said, “There’s a strong motive in Australia to keep your house at all costs, so you can leave it to your children.“People also often downsize their home later in life. However, it seems people think that downsizing is more lucrative than it actually is.
“Transactions costs can mean they free up far less cash than they think they will. Costs like stamp duty and commissions would be large and newer homes in their area attract a premium price.”